On Tuesday, Moody’s Investors Service bumped its rating of Chicago down from A3 to Baa1 with a “negative outlook.”
OK. In plain English, what does that mean?
» The rating is a way to measure the city’s creditworthiness. “What our rating scale provides is a relative measure of local governments versus other local governments,” Moody’s analyst Matthew Butler said. A Baa1 rating indicates moderate risk and certain “speculative characteristics.”
» Chicago is now near the bottom of the pack compared with other cities, Butler said: “I believe that in terms of major U.S. cities, Chicago is now definitely towards the lower end.”
» Why the downgrade? Chicago’s pension funds are billions of dollars short of meeting their obligations. “The Baa1 rating ... reflects the city’s massive and growing unfunded pension liabilities, which threaten the city’s fiscal solvency absent major revenue and other budgetary adjustments adopted in the near term and sustained for years to come,” the Moody’s report on the downgrade states.
» Since investment is perceived as riskier, the city may have to start paying higher interest rates on money it borrows “even in the short run,” said Richard Ciccarone, president of Merritt Research Services. “The next borrowing will probably be a little more expensive.”
» If borrowing money is more expensive, that cost could trickle down to taxpayers. Moody’s recommends that Illinois commit to pension reform in order to raise its rating—and says Chicago should “significantly increase revenue.”